FINANCIAL Exchange Traded Fund Basics An Exchange Traded Fund (ETF) is a type of investment security representing ownership in a basket of securities such as stocks, bonds, or real estate holdings. …
Exchange Traded Fund Basics
An Exchange Traded Fund (ETF) is a type of investment security representing ownership in a basket of securities such as stocks, bonds, or real estate holdings. Some ETFs are broadly invested while others may focus on a narrow area of the investable market such as a specific geographic region or industry. ETFs provide investors an opportunity to easily own a broad range of underlying individual securities with one investment.
ETFs may be managed actively or passively. Actively man- aged ETFs have professional portfolio managers that analyze securities for consideration to buy, hold, or sell within the fund with the intention of making investment choices that are in-line with the objective of the fund. Common objectives of ETFs are growth, income, or a combination of growth and income. Passively managed ETFs attempt to mirror an index such as the S& P 500. “Index funds” are passively managed. Passively managed ETFs generally have lower expenses and are often more tax effi cient as there is generally less turnover (buying and selling) within a passively managed fund.
ETFs offer many of the same advantage as do mutual funds such as diversification, professional security selection and man agement, and most offer a low minimum investment. However, a unique advantage of ETFs, versus mutual funds, is that ETFs can be bought or sold intra-day as well as limit orders can be set on ETFs which allows investors to establish specific buy or sell parameters and pricing. ETFs also can offer investors the opportunity to invest in areas of the market, such as foreign stocks, that may be difficult to invest in on an individual basis. There are considerations and disadvantages in investing in ETFs. A drawback of ETFs, compared to mutual funds, is that an ETF share price may trade higher than the value of the individual securities held within that ETF. Additionally, most brokerages only allow investors to invest in whole share amounts of an ETF, unlike a mutual fund where fractional shares can be purchased. ETFs have an underlying expense and trading costs may be incurred which an investor should consider prior to investing. As is the case with all investments, there are “pros” and “cons” with ETFs.
ETFs are offered by prospectus. A prospectus contains information about the ETF which includes the objective and strategies of the fund, risks, fees and expenses, portfolio managers, and historical returns. ETF investors should carefully read the prospectus prior to investing.
Adam Smit is a CERTIFIED FINANCIAL PLANNERTM. His practice emphasizes an investment philosophy of investing in quality while holding for the long-term. Exchange traded funds are offered by prospectus. This article is not a solicitation of exchange traded funds but rather to be educational and informa- tive. ETFs trade like stocks, are subject to investment risk, fluc tuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors. Stock investing includes risks, including fluctuating prices and loss of principal. Securi ties offered through LPL Financial. Member FINRA/SIPC.
BY ADAM SMIT